As of 2018, the market size of block chain technology across BFSI market was valued at $277.1 million and is expected to reach $22.4 billion by 2026 with a CAGR of 73.8% during (2019-2026) period.
- Definition / Scope
- Market Overview
- Market Risks
- Market Trends
- Industry Challenges
- Technology Trends
- Regulatory Trends
- Market Size and Forecast
- Market Outlook
- Competitive Landscape
- Competitive Factors
- Key Market Players
- Strategic Conclusion
Definition / Scope
Blockchain is a technology that is operated via distributed ledger transactions in blockchain network that makes matching copies of transactions across multiple computer systems.
Thus, all the parties involved in the network can review the transaction. In addition, once the transaction is recorded it cannot be removed; it can only be changed with the consent of multiple parties involved in the network.
Until present, in payment systems there are several issues that persist such as high transaction cost for processing, multiple intermediaries, and longer duration for completion.
All these drawbacks of traditional payment systems are mitigated by blockchain as it doesn’t require any intermediaries, levies less transactional cost and is the most transparent payment system in the world today.
Some of the top impacting factors of blockchain technology across BFSI sector are as follows:
- Huge adoption in area of cross-border payments
- Transparency & accountability of transactions
- Increased scalability
- Enhanced security
The Global Blockchain technology in BFSI can be segmented according to following aspects:
- By component: The technology can further be segmented into platform and services.
- By application: Some of the common applications of blockchain technology in BFSI sector include, digital currency, record-keeping, payment & settlement, smart contracts, compliance management among others.
- By End User: Basically the end users of the blockchain technology are banks, insurance companies and non-banking financial institutions.
- By region: The segment primarily comprises several regions across which blockchain is growing around the world which include, North America, APAC, Europe & LMEA.
The Blockchain technology market is still in an infant stage as it was invented back in 2008, which makes the technology still fresh.
However, the technology has revealed ways it can change business processes and lead transparency, immutability and decentralization that has particularly made the technology appealing among the businesses and other areas.
One of the first-movers across industries to explore blockchain is also the BFSI market.
Despite of several obstructions that exist along the way, blockchain intends to transform the banking & financial services industry by offering two opportunities: first, cost reduction and second, labor savings.
In line with that, 24% of the BFSI executives are well aware about blockchain and its uses with significant number of executives from the North American region being familiar with the technology.
Considering the wide range of applications, companies are researching effective ways of applying blockchain.
According to a survey taken in 2018, 50% of the BFSI executives around the world believed that blockchain technology would have substantial effect on the sector within next 3 years.
In addition, 15% executives are planning to implement the technology aggressively across their business processes within 1-year period and 66% of the banks in particular were positive about implementing it at a large scale within next 4 years.
Blockchain technology is also set to help BFSI’s reduce operational costs by $13.5-15 billion annually and cost of risks by $1.1-1.5 billion annually.
In addition, both trading parties via blockchain will have an opportunity to reduce cost of capital by $1.1-$1.3 billion annually.
In the area of fintech, blockchain is leading revolution I.e. Fintech 2.0. The technology is helping fintech companies connect to a number of scenarios.
The technology is aiding digitalization, point-to-point value transfer which is helping multiple fintech companies to build robust financial infrastructure like that of banks.
Blockchain technology itself is disrupting the BFSI sector and also indirectly changing the landscape of the sector by becoming core-underlying technology which Fintech companies are utilizing the most.
|Potential of cost reduction in BFSI sector through Blockchain||Reduction range (annual, in billion dollars)|
|Cost of risks||1.1-1.5|
|Cost of capital||1.1-1.3|
Some of the major risks that blockchain technology poses for the banking & financial institutions market are as follows:
- Strategic risk: Firstly, the firms need to identify whether they want to lead an adoption or wait until the technology matures. Secondly, the firms need to identify right network to participate in and finally, they need to determine the limitations in the product or services delivered via the platform. Failure to identify possible situations and inability to plan effective strategies could lead to unwanted repercussions.
- Business continuity risk: Generally, blockchain technologies are irrepressible in nature as the process is redundant and system is distributed in nature. However, the business processes built within the blockchain network could be vulnerable to operational failures and cyber attacks.
- Reputational risks: In contrast to fintech applications, blockchain applications require to work seamlessly with the legacy infrastructure of Bank & Financial institutions failure to do so could lead to a poor client experience and other regulatory issues.
- Security risk: Blockchain provides transaction security but doesn’t provide account security, which is tied to it. The database of the network itself is safe but the account connected to the network is exposed to cyber attacks.
- Regulatory risk: Around the globe, there has been rising uncertainty around the regulatory requirements of blockchain applications. The regulatory risk ranges across several areas within blockchain such as participants in the network, whether the framework permits domestic or cross border transactions etc.
- Supplier risks: Firms adopting blockchain may be unprotected and agonized with third-party risks since most of the technology might be obtained from external vendors.
Around the world, rise in digital payment systems and introduction of policies and procedures around payment & payment related technologies are acting as the major drivers of blockchain application across the BFSI market.
According to a survey taken of 300 professionals from international BFSI market, 64% firms are searching for real-time payment tracking and 42% are looking for instant payments.
To meet such unique demands, blockchain technology has been invented and as the technology is able to serve such needs, companies are looking to adopt blockchain across their business processes.
The blockchain technology is not only meeting the independent demand of companies but is also aiding increased transaction speed across real-time global payment system which then is supporting the monetary policy and compliance & privacy.
Security and transparency are two major critical factors upon which the BFSI market and its players operate. For instance, around the world, 45% of the BFSI are vulnerable to crimes regularly which is why banks & other financial institutions are looking for blockchain solution as payment processing via blockchain network eliminates need of third-party payment gateways which then leads transactions to be performed quickly.
In addition, major opportunities are expected to be provided as the technology continues to grow. Thus, increased anticipation of such benefits & risk-avoiding model of the technology is also driving its implementation across the sector.
Interoperability issues: the blockchain technology is not controlled by the international rules and regulations, thus there are several standards for the technology to be operated which leads to interoperability issues. In contrast, the technology needs to be compatible with different systems across industries.
A bigger challenge is integrating existing systems with a blockchain based models as present systems & practices cannot be eradicated completely. Thus, only if blockchain technology adopts multiple systems then operational feasibility can be acquired.
Security: A blockchain network is generally secure as it is equipped with cryptography tools however, when the network is enabled into any banking institution, it needs to be more secured via multiple security protocols.
The network should also restrict participating authorities to take control of the network and limit their rights according to the level of involvement permitted to them.
The permissions provided for each participant varies from transaction to transaction which is why permissions need to be monitored to save the network from becoming breached.
Legal regulations: In case blockchain technology is applied to the banking sector, there is also need for international and national regulations to monitor its operations.
At present, cryptocurrencies are the single most used blockchain application but unfortunately, don’t have any binding laws that regulate it which makes it prone to both huge profits and losses.
Financial sector is a highly regulated industry and thus, to avoid any chaos within it in near future, regulations need to be established for blockchain as well.
Encryption: Private code messages are essential part for the blockchain system/technology as they allow data security of an individual while transacting on the system.
If the private key is generated, it has to be maintained securely because if it is lost then there is no way to get all those secured data back.
Further, the encryption if not handled properly can be exposed to cybercriminals which they then use to find loopholes in the network and thus, the blockchain network could become vulnerable to cyberattacks.
Privacy: Banks & FI’s have reputation among the customers and are highly trusted because they store huge amounts of public funds. If blockchain is implemented fully into a banking system, the technology is faced with challenge to keep the customer’s data, which is stored in the system secure so that it wouldn’t impede individuals’ identity at any cost.
Thus, transactions made on public blockchain are publicly available, however, there is need to explore potential of private blockchain especially for data critical sectors such as BFSI.
Scalability: The existing databases of BFSI market is increasing tremendously as bank clients are increasing in number.
This in return poses a huge challenge for the blockchain technology providers as their network needs to be able to manage the growing amount of traffic while maintaining the speed at which transactions are handled.
In case, the technology is applied to current banking systems, it must have the ability to scale up in order to cope up with large volumes of data.
Energy Consumption: At present, the successful blockchain networks are the ones that operate on concept of proof-of-work method where the network participants are compensated based on how to solve the equation to add a new block to the network.
This helps to keep the network to run smoothly but at the same time also increases the energy consumption enormously via computational work which leaves enormous amounts of carbon footprints than then hampers the environment.
Thus, the issue could be solved by compensating the participants via an alternative mechanism.
In case of financial institutions and banks, blockchain technology has the potential to transform ways of working and several other problems that currently exist. Within the industry, so far, 18 applications across 3 major categories have been identified which are as follows:
- Smart Contracts: These include applications such as escrow accounts, digital rights and wagers
- Digital currency & securities: The category involves applications such as equity, private markets, derivatives, crowd funding & debt.
- Record keeping: The applications ranging in this area include, ownership, voting, IP, title records and healthcare.
Currently, all of the mentioned applications are not in use as the best possible way of implementing them is being researched. However, the blockchain applications that are actually representing the current face of BFSI market are as follows:
Fraud prevention: The overall banking and financial services sector operates fundamentally on money system, thus security is both concern and of great importance to the companies.
Annually, more than 40% of the BFSI’s are continuously exposed to fraud and cybercrime and the only reason for that is lack of a decentralized database system.
In contrast, blockchain is providing a secure, non-malicious technology on a distributed database system. In blockchain, all the transactions recorded are stored in form of cryptographic instrument, which is impossible to corrupt.
For instance, if one block is breached, all other blocks in the chain set for change which helps to identify & track breach and leaves hacker with no other way to make changes to overall system. Thus, the technology holds potential to eradicate the cybercrimes and attacks occurring everywhere across the financial sector.
KYC (Know Your Customer): Currently the KYC and AML procedures are being followed manually which is incurring tremendous costs for the Banks and FI’s. These processes consume time and have to be performed individually by companies across the landscape.
Thus, costs of such processes are estimated to be around $60-500 million annually. In contrast, with adoption of blockchain, the independent verification of each client can be shared among multiple banks & FI’s across the blockchain network which mitigates duplication of KYC process and all updates of clients will be accessible to multiple banks in near –real time via blockchain system.
In turn, this application is reducing admin tasks as well as compliance needs.
Smart Assets: The trade finance is challenging, as transactions in form of assets need to be recorded with clear date and time stamp. The supply chain involved in the process is so complex that it involved detailed documentation of demand and supply.
Blockchain technology aids in smart asset system where through the technology, the system is maintained in digital form and gets updated automatically in real-time without having to document it manually. The system can also track where a particular item is delivered and where it has initially come from.
For banks, they can have access to rich data set from the system which then they can turn into valuable information for the clients and improve their service.
Other Key Market Trends
There are basically two approaches to blockchain technology in BFSI and across other markets as well:
Permissionless blockchain: A public blockchain in general, allows any party or individual to interact with the network and run a node. For instance, blockchain technologies such as Bitcoin, Ethereum, Litecoin & EOS are permissionless.
The benefits of such blockchain technologies include: increased decentralization, transparency etc. In case of a bank, the entity might not be interested in allowing everybody to become a part of the network or give them permissions.
More lately, applications such as Zcash, Monero & Grin are focusing to make their technology more private by using zero knowledge proof algorithms.
Permissioned blockchain: Also known as private blockchain, the approach allows only parties with access to the network to participate in transaction and audit the information & data.
Around the world, consortiums are being created to bring all BFSI’s together and work on private blockchain without revealing critical data that shouldn’t be exposed to public. Some of the private set of consortiums working in the area include, Ripple, Stellar & R3 among others.
Market Size and Forecast
- As of 2018, the market size of blockchain technology across BFSI market was valued at $277.1 million and is expected to reach $22.4 billion by 2026 with a CAGR of 73.8% during (2019-2026) period.
- According to the regional analysis, the market share of top country and regional markets were as follows:
- The US accounted approximately 76% of the total market i.e. being the top country market at $210.5 million market value
- The entire European region accounted almost 15% of the total market with a market value of $41.5 million.
- China & India together accounted 5% of the market i.e. $13.8 million market value and rest of the APAC region accounted 3% of the market share i.e. $8.3 million respectively.
- Remaining 1% i.e. $2.7 million was accounted by the rest of the world, which includes other regions such as LMEA, Middle East & Africa.
As per the segment analysis, the outlook of blockchain across BFSI is as follows:
- The platform segment remained dominant in 2018, however, services segment is registering a growth rate of 76.1% during 2019-2026 period.
- As of 2018, the smart contracts market generated the highest revenue but compliance management at 78.7% captures the fastest growth during the forecast period respectively.
- The banking segment generated highest revenue for leveraging block chain in banking; however, insurance segment is set to rise at CAGR of 75.7% during 2019-2026.
- As of 2018, although North America ruled the blockchain market size in BFSI, Asia Pacific is the fastest rising region with a CAGR of 79.3% during 2018-2026 period.
Some of the international institutions around the world such as UN and IMF along with developed countries such as Japan, US and UK are working together to lay out framework on developing and implementing blockchain applications across various fields in BFSI market.
Some of the other countries such as China, Russia, South Africa and India among others have initiated research on blockchain technology. In line with that, since 2015, a number of banks & FI’s have begun formulation of blockchain framework for the sector.
Goldman Sachs, JP Morgan & UBS among others have their own dedicated blockchain lab and are piloting the blockchain platforms by collaborating with several blockchain vendors.
Different types of industrial consortiums have been established since the blockchain technology started receiving traction. Some of these include, Bankchain, ChinaLedger, EEA, FISCO, GBBC, FundChain and R3 among others.
Among these, R3 is the biggest consortium with over 40 of the world’s leading financial institutions including, CitiGroup of America, Barclays Bank, Deutshe Bank and Morgan Stanlay among others being its members.
Besides traditional incumbents, the companies falling under non-banking financial institutions or fintech companies are also highly interested in leveraging blockchain.
As of 2018, 77% of the Fintech Institutes around the world expect to adopt the technology as part of their regular business system process by 2020.
In UK, Santander is the first bank to use blockchain technology to aid international payments. The extended processing of international payments is over, funds get delivered within one working day.
Together American Express & Santander have also collaborated with Ripple to allow cross-border payments via blockchain technology, this has been able to speed up the payments between UK and US gradually than before.
The Polish Bank Association has a subordinate also known as Credit Data Processing Bureau which has credit records of about 150 million Europeans.
The British Fintech company called Billion Group that received 1 million euros of investments from the EU in 2017, came up with a unique blockchain based solution for the Bureau which helps it process customer data efficiently.
In the US, JPMorgan Chase is so much confident regarding the blockchain technology that they have allocated a separate enterprise called Quroum division to study and implement the technology.
In addition, the bank is piloting applications for financial process and has already issued an annual deposit certificate with a floating rate based on distributed records. Another bank, Goldman Sachs is also actively supporting distributed network technology and has invested in a blockchain company called Circle.
The bank intends to become leader in crypto currency and also aims to create its crypto currency unit in near future.
In developing countries, some blockchain companies have been established to improve B2B payments. For instance BitPesa is a company that enables B2B payments for countries such as Kenya, Nigeria & Uganda. The application has already processed millions of payments and is increasing at the rate of 20% month-over-month.
Bit Pay is another player in the payment services area where merchants accept bitcoin store payments. The company already has already established partnerships with over 40 e-commerce platforms such as Shopify and Lemonstand among others. Simialrly, Ohio in the US has become the first state to accept tax payments in the form of bitcoin via BitPay’s platform.
Ripple is another enterprise blockchain service provider and pioneer in the technology especially in the area of clearance and settlement. The company is known for its cryptocurreny XRP. In addition, the company is venture-backed and is building blockchain solutions for banks to use for clearance and settlement.
For instance, its xCurrent platform provides bank faster, two-way communication protocol that allows real-time messaging and settlement.
Finally, R3 is one of the major player that is currently developing efficient distributed ledger technology for banks and financial institutions.
The company was successful in raising $10.7 million from banks such as Bank of America, Merill Lynch and HSBC in 2017. So far, R3 is the most influential blockchain consortium in the world so far.
Key Market Players
Some of the top blockchain companies around the world that are catering exclusively to the BFSI sector are as follows:
- Alphapoint (US): AlphaPoint Corporation operates as an exchange software technology company. The Company offers digital currency exchange technology platform, crypto currency, foreign exchange enterprise software licensing, and asset integration system. AlphaPoint serves customers in the US and India.
- Auxesis Group (India): Auxesis group is a technical innovation company with advance competency in Fintech and Blockchain Technology. Working for the development of new innovative technological solutions by providing a balance between technology and economic sustainability for the start-ups. Currently, the company’s notable blockchain initiatives encompass sectors such as Banking, Remittance, Insurance, Supply Chain, Event, and Ticketing industry while Pharmaceuticals, Luxury Goods, Gambling among others.
- Amazon Web Services, Inc., AWS (US): AWS Blockchain is the blockchain arm of AWS and it mainly creates templates to help enterprises create and deploy blockchain networks on AWS using various blockchain frameworks.
- Bitfury Group Limited. (US): The Bitfury Group is the largest full-service blockchain technology company in the world based in San Francisco, US that is helping to develop and deliver cutting-edge software and hardware solutions necessary for businesses, governments, organizations and individuals to securely move assets across the blockchain.
- Infosys Limited (India): The Company addresses blockchain and adjacent technologies including shared ledger, distributed ledger and smart contracts. Infosys provides a host of offerings to help in the adoption, integration and realization of blockchain networks. Infosys also brings its strength in other technology areas to complement or combine with blockchain and help amplify its value.
- Microsoft Corporation (US): In 2017, Microsoft started to pick up pace with the launch of its blockchain development kit and the Azure Blockchain Workbench. Today, ahead of its Build developer conference, Microsoft is going a step further by launching Azure Blockchain Services, a fully managed service that allows for the formation, management and governance of consortium blockchain networks. Microsoft’s blockchain systems is an enterprise service meant to help businesses build applications on top of blockchain technology. It is integrated with Azure Active Directory and offers tools for adding new members, setting permissions and monitoring network health and activity.
- Oracle Corporation (US): Oracle Corporation is providing an easier way to adopt blockchain for businesses to transform their enterprise with the industry’s most comprehensive and enterprise blockchain platform. The blockchain platform of Oracle allows extension of business processes and applications while enabling business transactions to process quickly. The platform also gives enterprises an opportunity to build and run smart contracts and maintain tamper-proof distributed ledger using an independently-installable version of Oracle Blockchain Platform built on containers and delivered as pre-built VM image for multiple virtualization options.
- Accenture (Ireland): In 2017, Accenture introduced ‘circular supply chain’ allowing customers to make more sustainable choices about what they buy. This has been made possible via digital identity management and blockchain technology. For the same, Accenture is also reported to have collaborated with Mastercard, Amazon Web Services, Everledger and Mercy Corps to build its supply chain capability. In addition, Acccenture is also working on building in-store, web and app-based implementations where consumers could scan a unique digital identifier on an item registered to the people who produced it.
Considering specially the BFSI sector, thousands of funds are being transferred from one region of the globe to another within a single day, this makes the global financial system one of the most popular sectors that could be benefited via the application of blockchain.
The traditional way of working and manual networks could make the sector more susceptible to frauds which is why the blockchain technology has potential to grow tremendously within the sector.
Despite of that, blockchain has number of challenges associated with it such as lack of regulations efficiency and security, which will be resolved in near time in future.
Hence, the full integration of blockchain into banking will surely occur and its revolution is most likely to begin from the BFSI sector.
- BFSI Banking, financial services and insurance